Offer for Abbey Nat. - Part 3
Lloyds TSB Group PLC
31 January 2001
Part 3 of 3
APPENDIX VI
Statement of estimated cost savings
1. Summary
Lloyds TSB and Abbey National overlap in each of Abbey National's main areas
of operation, providing the potential for substantial cost savings. Based on
public information and industry benchmarks, Lloyds TSB has estimated
significant cost savings from a transaction with Abbey National. Taking into
account its experience from the successful integration of Cheltenham &
Gloucester, TSB and Scottish Widows, Lloyds TSB expects to realise cost
savings by removing duplicated costs and achieving greater economies of scale.
Lloyds TSB believes, based on its proven skills and processes, that it is a
leader in change management and merger integration.
The Board of Lloyds TSB estimates that the transaction will result in
annualised cost savings of at least £700 million in the fifth financial year
(2006) following completion of the transaction of which £650 million is
expected to be achieved in the fourth financial year (2005) following
completion of the transaction.
Lloyds TSB estimates that, in the fourth financial year (2005) following
completion of the transaction, the combination of central functions will
deliver savings of £165 million, the integration of retail banking networks
and systems will deliver savings of £250 million and the combination of
businesses will deliver savings of £235 million.
Lloyds TSB believes that the estimated cost savings can be realised with
minimal impact on the combined customer and revenue base and will arise from
the following key areas
* Head office and retail headquarter integrations; IT consolidation, including
the merger of personal banking systems, data centres and networks; combining
central operations including mailing, bulk processing, clearings and
administration; purchasing benefits through the larger scale of the combined
operations; and combining central functions
* Combining the operations, systems and administration in support of retail
banking and mortgages, including the integration of customer service centres;
back offices; processing centres; telephone centres; and e-commerce operations
and systems
* Co-locating branches, the emphasis being on minimising customer disruption
* Combining the operations, systems and support functions of Lloyds TSB's and
Abbey National's respective life, pensions, investments, general insurance,
asset finance and wealth management businesses
This statement of estimated cost savings should be read in conjunction with
the notes to this appendix and the further details set out below.
The above estimated cost savings are given in the money of the year in which
they are expected to be achieved.
Lloyds TSB's detailed review suggests that the overall one-off cost of
achieving these savings is expected to be approximately £1.1 billion, spread
over the period in which the cost savings are expected to be achieved.
The above estimates should not be interpreted to mean that the earnings per
share of the enlarged Lloyds TSB Group for the current or future financial
years would necessarily match or exceed the historical published earnings per
share of Lloyds TSB.
2. General basis of preparation
Based on public information, industry benchmarks and the experience of Lloyds
TSB, Lloyds TSB has constructed an estimate of the main components of Abbey
National's cost structure, identified the principal areas for potential cost
savings and quantified these cost savings. Lloyds TSB has not had access to
any information prepared by Abbey National that is not in the public domain
and has not had the opportunity to discuss the reasonableness of the plans or
assumptions supporting the cost savings estimates with the management of Abbey
National.
The statement of estimated cost savings has been reported on under the Code by
PricewaterhouseCoopers and by Lloyds TSB's financial advisers (Merrill Lynch
and J.P. Morgan).
3. Notes
a) In arriving at the statement of estimated cost savings set out in this
appendix, the Directors of Lloyds TSB have assumed that
* there will be no significant impact on the business of the Enlarged Group
arising from any decisions made by competition or regulatory authorities
* there will be no material change to the market dynamics in the Enlarged
Group's core markets following completion of the Offer
* there will be no unforeseen difficulties in the integration of Abbey
National's businesses with those of Lloyds TSB, including, where appropriate,
in the migration of the businesses onto the relevant platform and systems
* Abbey National becomes a wholly-owned subsidiary of Lloyds TSB before the
end of the third quarter of 2001
* there is no contract (the existence or terms of which are undisclosed) that
could affect the timing or realisation of cost savings
* the Abbey National outsourcing agreement with The Capita Group Plc,
announced on 10 January 2001, may be terminated or renegotiated on terms
satisfactory to Lloyds TSB
* general economic conditions in the UK are not less favourable than expected
* either (i) the banking transfer provisions in Part VII of the Financial
Services and Markets Act 2000 shall come into force and by not later than mid
2003 Lloyds TSB shall have obtained the necessary Court orders to enable its
merger integration plans to be implemented or (ii) by not later than mid 2003
Royal Assent shall have been given to a Private Act of Parliament promoted by
Lloyds TSB enabling it to implement such merger integration plans
b) The cost savings estimates are given in the money of the year in which they
will be achieved, assuming cost inflation of 3.0 per cent. per annum and
general inflation of 2.5 per cent per annum.
c) In addition to Lloyds TSB's management information, the sources of
information which Lloyds TSB has used to arrive at the estimated cost savings
include the following
* Abbey National's annual reports and accounts
* Abbey National's presentations to analysts
* Abbey National's website
* brokers' research
* independent market research
* other public information
* Lloyds TSB's knowledge of the industry and of Abbey National
d) The Board has not had discussions with Abbey National's management
regarding the reasonableness of their assumptions supporting the estimated
cost savings.
e) Due to the scale of a combined Abbey National and Lloyds TSB organisation,
there may be additional changes to the Enlarged Group's operations. In
addition, there are several material assumptions underpinning the estimates,
including the allocation of costs within Abbey National, the relative
proportion of volume-sensitive costs within Abbey National and the level of
costs necessary to operate effectively each combined function or activity.
f) Because of the factors set out in this appendix, and the fact that the
estimates relate to the future, there are inherent risks in these forward
looking estimates and the resulting cost savings may be materially greater or
less than those estimated.
g) The statement of estimated cost savings set out in this appendix has been
reviewed by PricewaterhouseCoopers and by Merrill Lynch and J.P. Morgan.
Copies of a letter from PricewaterhouseCoopers and a letter from Merrill Lynch
and J.P. Morgan relating to this statement are set out below.
4. Letter from PricewaterhouseCoopers Pricewaterhouse Coopers
Southwark Towers
32 London Bridge Street
London SE1 9SY
Telephone +44 (0) 20 7939 3000
+44 (0) 20 7583 5000
Facsimile +44 (0) 20 7378 0647
The Directors Merrill Lynch International
Lloyds TSB Group plc Ropemaker Place
71 Lombard Street 25 Ropemaker Street
London London
EC3P 3BS EC2Y 9LY
J.P. Morgan plc
125 London Wall
London
EC2Y 5AJ
31 January 2001
Dear Sirs
Offer for Abbey National plc ('Abbey National')
We refer to the statement of the estimated cost savings ('the Statement') made
by the Directors of Lloyds TSB Group plc ('Lloyds TSB') as set out in appendix
VI to the announcement dated 31 January 2001.
Responsibility
The Statement is the sole responsibility of the Directors of Lloyds TSB. It
is our responsibility and that of Merrill Lynch International ('Merrill
Lynch') and J.P. Morgan plc ('J.P. Morgan') to form our respective opinions,
as required by Note 8(b) to Rule 19.1 of the City Code on Takeovers and
Mergers ('the Code'), as to whether the Statement has been made by the
Directors of Lloyds TSB with due care and consideration.
Basis of opinion
We conducted our work in accordance with the Statements of Investment Circular
Reporting Standards issued by the Auditing Practices Board.
We have reviewed the relevant bases of belief (including sources of
information) and calculations underlying the Statement. We have discussed the
Statement together with the relevant bases of belief (including sources of
information) with the Directors of Lloyds TSB and those officers and employees
of Lloyds TSB who developed the underlying plans, and with Merrill Lynch and
J.P. Morgan.
Our work did not involve any independent examinations of any of the financial
or other information underlying the Statement. We have also considered the
letter dated 31 January 2001 from Merrill Lynch and J.P. Morgan to the
Directors of Lloyds TSB on the same matter.
We do not express any opinion as to the achievability of the estimated cost
savings identified by the Directors of Lloyds TSB.
Opinion
In our opinion, based on the foregoing, the Statement has been made with due
care and consideration, in the context in which it was made.
Our work in connection with the Statement has been undertaken solely for the
purposes of reporting under Note 8(b) to Rule 19.1 of the Code to the
Directors of Lloyds TSB and to Merrill Lynch and J.P. Morgan. We accept no
responsibility to Abbey National or its shareholders or any other person other
than Lloyds TSB and its Directors and Merrill Lynch and J.P. Morgan in respect
of, arising out of or in connection with that work.
Yours faithfully
PricewaterhouseCoopers
Chartered Accountants
5. Letter from Merrill Lynch and J.P. Morgan
J.P. Morgan plc Merrill Lynch International
125 London Wall Ropemaker Place
London EC2Y 5AJ 25 Ropemaker Street
London EC2Y 9LY
Regulated by SFA Regulated by SFA
Registered in England Registered in England
Reg. No. 248609 Reg. No. 2312079
The Directors
Lloyds TSB Group plc
71 Lombard Street
London EC3P 3BS
31 January 2001
Dear Sirs
Offer for Abbey National plc ('Abbey National')
We refer to the statement of estimated cost savings ('the Statement') made by
the Directors of Lloyds TSB Group plc ('Lloyds TSB') as set out in appendix VI
to the announcement dated 31 January 2001, for which the Directors of Lloyds
TSB are solely responsible.
We have discussed the Statement, together with the relevant bases of belief
(including sources of information), with the Directors of Lloyds TSB and those
officers and employees of Lloyds TSB who developed the underlying plans. Our
work did not involve independent examinations of any of the financial or other
information underlying the Statement. We have also reviewed the work carried
out by PricewaterhouseCoopers and have discussed with them the conclusions
stated in their letter of 31 January 2001 addressed to yourselves and
ourselves on this matter.
We have relied on the accuracy and completeness of all the financial and other
information reviewed by us and have assumed such accuracy and completeness for
the purposes of rendering this letter.
We do not express any opinion as to the achievability of the estimated cost
savings identified by the Directors of Lloyds TSB.
Our work in connection with the Statement has been undertaken solely for the
purposes of reporting under Note 8 (b) of Rule 19.1 of the City Code on
Takeovers and Mergers to the Directors of Lloyds TSB and for no other purpose.
We accept no responsibility and, to the fullest extent permitted by law,
exclude all liability to any person other than Lloyds TSB and its Directors in
respect of, arising out of or in connection with that work.
In our opinion, based on the foregoing, the Statement, for which the Directors
of Lloyds TSB are solely responsible, has been made with due care and
consideration in the context in which it has been made.
Yours faithfully
for and on behalf of for and on behalf of
J.P. Morgan plc Merrill Lynch International
Terry Eccles Matthew Greenburgh
Vice Chairman Managing Director
Investment Banking
APPENDIX VII
Bases and sources of information
a) Unless otherwise stated, the financial and other information concerning
Lloyds TSB and Abbey National in this announcement has been extracted or
derived from interim statements, preliminary results and the annual reports
and accounts of each company for the relevant periods, or from other published
sources or from Lloyds TSB management sources.
b) As at 29 January 2001 (the latest practicable date prior to this
announcement) there were 5,507,549,291 Lloyds TSB Shares in issue.
c) The closing middle-market price of a Lloyds TSB Share on 30 January 2001 of
735 pence is derived from the Daily Official List.
d) The statements on page 1 that the Offer values Abbey National at
approximately £19.8 billion and that the Offer includes £3.8 billion of cash
on a fully diluted basis are based upon the fully diluted ordinary share
capital of Abbey National being (i) 1,429,353,000 Abbey National Shares in
issue on 29 January 2001 (the latest practicable date prior to this
announcement), such number being derived from Datastream International
Limited; and (ii) the statement in Abbey National's annual report and accounts
for the year ended 31 December 1999 that there were, as at the date of that
document, 26,013,600 Abbey National Shares under option.
e) References to historic share price performance have been extracted from
Datastream International Limited or the Daily Official List.
f) The statement on page 1 that the Offer represents a premium of 40 per cent.
over the average closing prices for Lloyds TSB and Abbey National Shares for
the one month prior to 3 November 2000 is calculated by reference to
information derived from Datastream International Limited.
g) The statement on page 5 that, for Abbey National Shareholders, the dividend
and interest income from the New Lloyds TSB Shares and cash they will receive
under the Offer will be 26.7 per cent. higher than the dividend income from
their Abbey National Shares is based on (i) dividend income on a Lloyds TSB
Share of 30.89 pence, based upon the final dividend for the year ended 31
December 1999 of 18.50 pence (net) together with the 2000 interim dividend of
9.30 pence (net), grossed up by a factor of 100/90; (ii) dividend income on an
Abbey National Share of 46.67 pence, based upon the final dividend for the
year ended 31 December 1999 of 26.85 pence (net) together with the 2000
interim dividend of 15.15 pence (net), grossed up by a factor of 100/90; and
(iii) income from the cash consideration, calculated on the assumption that
the cash is re-invested in UK Government securities so as to achieve an income
of 4.92 per cent. per annum, being the average gross redemption yield on
medium coupon UK Government fixed rate securities of maturities of 5 to 15
years, as derived from the FT Actuaries Index as at 29 January 2001, as
published in the Financial Times on 30 January 2001, the latest practicable
date prior to this announcement. The statement does not take into account any
liability to taxation.
h) The statement on page 5 that Abbey National Shareholders will own
approximately 28 per cent. of the Combined Group is calculated by reference to
the number of Lloyds TSB Shares in issue as referred to in paragraph (b) above
and the number of Abbey National Shares in issue and under option as referred
to in paragraph (d) above.
i) The statement on page 7 that the Combined Group will be a leader in its
home market is derived from Lloyds TSB management sources.
j) The statement on page 7 that the Combined Group will be one of the largest
financial services groups in Europe is derived from data supplied by FTSE
International Limited 2001 dated 30 January 2001.
k) The statement on page 7 that a Combined Lloyds TSB and Abbey National will
be a leading UK retail financial services group is derived from Lloyds TSB
management sources.
l) The statement on page 7 that: (i) Abbey National personal customers
currently use 722 Abbey National branches is derived from Abbey National's
interim results for the six months ended 30 June 2000; and (ii) they will also
be able to use more than 2,200 Lloyds TSB branches is derived from Lloyds TSB
management sources.
m) The statement on page 9 that since the merger of Lloyds Bank and TSB,
Lloyds TSB has successfully co-located some 340 branches is derived from
Lloyds TSB management sources.
n) The statement on page 9 that for the 250 branches co-located during 1999,
customer recruitment was 11.5 per cent. better than experienced by those
branches in the previous year and attrition, as a result of co-location, has
been less than 0.1 per cent. is derived from Lloyds TSB management sources and
is by reference to Lloyds TSB's national average for customer attrition.
o) The statement on page 10 that Lloyds TSB has an average 2.30 Lloyds TSB
products per personal customer is derived from Lloyds TSB management sources.
p) The statement on page 10 that Abbey National has an average 1.75 Abbey
National products per personal customer is derived from Abbey National's
interim results for the six months ended 30 June 2000.
q) The statement on page 10 that Lloyds TSB mortgage customers hold on average
4.55 Lloyds TSB products is derived from Lloyds TSB management sources.
r) The statement on page 13 that over 80 per cent. of Lloyds TSB's UK
employees are shareholders of Lloyds TSB is derived from Lloyds TSB's annual
report and accounts for the year ended 31 December 1999 and Lloyds TSB
management sources.
s) The statement on page 13 that the majority of Abbey National's employees
are shareholders of Abbey National is derived from Abbey National's annual
report and accounts for the year ended 31 December 1999.
t) The statement on page 14 that the union with the largest staff membership
within Lloyds TSB, LTU has indicated that it supports the case for a merger as
being in the interests of both Lloyds TSB and Abbey National staff is derived
from the Lloyds TSB Group Union newsletter to its members dated 12 January 2001.
u) The statement on page 14 that Lloyds TSB is already the largest corporate
giver in the UK is derived from Smythe, J. and Casson, D., 'The Guide to UK
Company Giving - 1999 Edition'.
v) The statement on page 14 that the Lloyds TSB Foundations are expected to
receive a further £34 million in 2001 is based on a contribution rate of 1 per
cent. of the Lloyds TSB average annual profit for the three years ended 31
December 2000 excluding minority interest and profit and losses on the
disposal of businesses.
w) The statement on page 14 that based on the present levels of Abbey National
profits, the transaction will lead to the Lloyds TSB Foundations receiving an
additional £15 million per annum is based on Abbey National's reported profits
before tax and extraordinary items as derived from Abbey National's annual
report and accounts for the years ended 31 December 1997, 1998 and 1999 and
assumes a contribution rate of 1 per cent. which is equivalent to that at
which Lloyds TSB currently contributes.
x) The statement on page 16 that lloydstsb.com is consistently one of the most
visited financial websites in Europe is derived from 'E-Finance Traffic
Trends', Schroder Salomon Smith Barney Industry Report, 6 December 2000 ('the
SSSB Report'). In addition to internal anlysis, the SSSB Report relies on
data obtained from MMXI Europe BV. This data is limited to the UK, Germany
and France and the published numbers used in the SSSB Report are extrapolated.
The SSSB Report concludes, however, that the MMXI figures offer the best
available perspective on website activity in Europe.
y) The statement on page 19 that the Offer values each Abbey National Share at
1,362.5 pence is calculated by reference to the closing middle market price of
a Lloyds TSB Share on 30 January 2001 derived as described in paragraph (c)
above.
z) For the purposes of the financial comparisons contained in this
announcement, no account has been taken of any liability to taxation or the
treatment of fractions.
APPENDIX VIII
Definitions
The following definitions apply throughout this announcement, unless the
context requires otherwise:
'Abbey National' Abbey National plc
'Abbey National ADSs' American Depository Shares of Abbey National, each
representing two Abbey National Shares
'Abbey National Group' Abbey National and its subsidiaries and
subsidiary undertakings and, where the context
permits, each of them
'Abbey National Share the Abbey National executive and employee share
Schemes' schemes
'Abbey National holders of Abbey National Shares
Shareholders'
'Abbey National Shares' the existing unconditionally allotted or issued
and fully paid ordinary shares of 10 pence each in
the capital of Abbey
National and any further shares which are
unconditionally allotted or issued
before the date on which the Offer closes (or such
earlier date or dates, not
being earlier than the date on which the Offer
becomes unconditional as to
acceptances or, if later, the first closing date of
the Offer, as Lloyds TSB may decide)
'Act' the Companies Act 1985, as amended
'Annual Report and the annual report and audited accounts of Abbey
Accounts of Abbey National for the year ended 31 December 1999
National'
'Authorisations' authorisations, orders, grants, recognitions,
confirmations, consents, clearances, certificates,
permissions or approvals
'Bank of Scotland' the Governor and Company of the Bank of Scotland
'Board' the Board of directors of Lloyds TSB
'business as usual business as usual operating profit has the
operating profit' meaning given to it on page 31 of this announcement
'Code' The City Code on Takeovers and Mergers
'Combined Group' or the Lloyds TSB Group following the acquistion
'Enlarged Group' of Abbey National pursuant to the Offer
'Daily Official List' the Daily Official List of the London Stock
Exchange
'Form of Acceptance' the Form of Acceptance, Authority and Election for
use by Abbey National Shareholders in connection
with the Offer
'FSA' the Financial Services Authority in its capacity as
the regulator of insurance business under the
Insurance Companies Act 1982, as regulator of
banking business under the Banking Act 1987 and as
the UK Listing Authority,
as the case may be
'IMRO' Investment Management Regulatory Organisation
'Interim Results' the interim results of Abbey National for the six
months ended 30 June 2000
'J.P. Morgan' J.P. Morgan plc
'LIBOR' the London Interbank Offered Rate
'Listing Rules' the listing rules made by the UK Listing Authority
under section 142 of the Financial Services Act 1986
'Lloyds TSB' or Lloyds TSB Group plc
'Company'
'Lloyds Bank' Lloyds Bank plc (now called Lloyds TSB Bank plc)
'Lloyds TSB Group' or Lloyds TSB and its subsidiaries and subsidiary
'Group' undertakings and, where the context permits,
each of them
'Lloyds TSB holders of Lloyds TSB Shares
Shareholders'
'Lloyds TSB Shares' ordinary shares of 25 pence each in the capital
of Lloyds TSB
'Lloyds TSB the four regional charitable foundations
Foundations' established at the time of the floatation of TSB and
which hold limited voting shares in the capital of
Lloyds TSB
'Loan Note Alternative' the right of Abbey National Shareholders to
elect to receive Loan Notes instead of some or all of
the cash to which they would otherwise be entitled
under the Offer
'Loan Notes' floating rate unsecured loan notes of the
Company to be issued pursuant to the Loan Note
Alternative
'London Stock Exchange' London Stock Exchange plc
'Merrill Lynch' Merrill Lynch International
'Mix and Match Election' the right of Abbey National Shareholders to
elect, subject to availability, to vary the
proportion in which they receive
New Lloyds TSB Shares and cash under the Offer or, as
the context requires, such an election
'New Lloyds TSB Shares' the new Lloyds TSB Shares to be issued, credited
as fully paid, pursuant to the Offer
'Offer' the offer to be made by Merrill Lynch and J.P.
Morgan (subject to satisfaction or waiver of the
pre-conditions set out in appendix I to this
announcement) on behalf of Lloyds
TSB to acquire all the Abbey National shares on the
terms and subject to the
conditions set out in the Offer
Document and the Form of Acceptance and, where the
context so requires, any
subsequent revision, variation, extension or renewal
of such offer
'Offer Document' the document to be despatched on behalf of
Lloyds TSB containing and setting out the terms and
conditions of the Offer
'Official List' the official list maintained by the UK Listing
Authority
'Panel' The Panel on Takeovers and Mergers
'PIA' Personal Investment Authority Limited
'SFA' The Securities and Futures Authority Limited
'Standards' the admission and disclosure standards made by the
London Stock Exchange from time to time
'TSB' TSB Group plc
'UK' the United Kingdom of Great Britain and Northern
Ireland
'UK Listing Authority' the FSA in its capacity as competent authority
under the Financial Services Act 1986
'US' or 'United States' the United States of America, its territories
and possessions, any state or political sub-division
of the United States of America and the District of
Colombia
'Wider Abbey National the Abbey National Group and associated
Group' undertakings and any other body corporate,
partnership, joint
venture or person in which Abbey National and such
undertakings (aggregating
their interests) have an interest of more than 20 per
cent. of the voting or
equity capital or the equivalent
'Wider Lloyds TSB the Lloyds TSB Group and associated
undertakings Group' and any other body corporate,
partnership, joint venture or person in which Lloyds
TSB and such undertakings (aggregating their
interests) have an interest of more than 20
per cent. of the voting or equity capital or the
equivalent
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